Identifying value amid the Gulf of Mexico Oil Spill

SITUATION: In the wake of the Deepwater Horizon oil spill in the Gulf of Mexico, we conducted a search for a company that had overly sold off in the wake of that crisis, but with no liability risk. Following our detailed search, we identified and purchased TGS-NOPEC Geophysical Co ASA (“TGS”), which provides multi-client seismic data to exploration and production ("E&P") companies in the oil & gas industry. Although TGS had no involvement in the Deepwater Horizon accident and would suffer no long term impact on the company’s long term potential, its share price declined significantly in conjunction with the entire sector.

OPPORTUNITY: TGS's library of seismic data is akin to a local monopoly. Once TGS has data for an area, there is no incentive for competitors to re-survey the same area, nor is it economic for customers to do the preliminary seismic survey themselves as it is cheaper and easier to licence the data from TGS. In short, TGS was a very uniquely positioned business with a solid balance sheet.

RESULT: We sold this investment after the stock doubled following the lifting of the ban on deep water drilling in the Gulf of Mexico.

Identifying value amid investor fatigue

AN AMAZING COMPANY: Inis a leader in the generic pharmaceuticals industry offering over 200 products to the pharmaceutical markets of U.S., Canada, and Israel. Taro has been able to generate 55% gross margins because it specialises in difficult-to-make generic drugs (such as creams and ointments) which limits competition.

OPPORTUNITY: Taro was suffering from: (1) overspending on capital expenditure between 2003 and 2006 which brought the company to the edge of bankruptcy; (2) losing its major stock exchange listing; and (3) a distracting takeover battle occurring since 2007 with Sun Pharmaceutical, which recently concluded. Investor ‘fatigue’ had set in and following the collapse of the share price we acquired a position which enabled us to purchase a high quality business, at a great price, together with a proven management team in the form of Sun, the new major shareholder.

RESULT: Over our holding period, Taro raised prices on its products, its margins increased and it successfully relisted on the NYSE with the shares increasing by 4-fold.

An obscured bargain

SITUATION: Our investment in Maritime Industrial Services represents one of our favourite situations: when one poorly performing division of a company masks solid underlying performance of the primary business.

OPPORTUNITY: We initiated a position as we foresaw a pending end to the poorly performing division’s result which had been obscuring the superior results the company was otherwise achieving.

RESULT: Our investment was made at a dramatic discount to a conservative valuation of the business - representing 37% of the worst case liquidation value. As the losses in one division ceased, the underlying value that was always there emerged and MIS was taken over by a competitor, giving us an investment gain of 217%.

Looking past the headlines

SITUATION: Macquarie Atlas Roads Group Limited (MQA) was formed from the split of Macquarie Infrastructure Group into a “good” toll roads business and a “bad” toll roads business.

OPPORTUNITY: We were drawn to MQA, the "bad" child. We reasoned that in the face of such adverse publicity few would bother investigating the stock prior to selling it shortly after it had been distributed to them as a result of their original holding in Macquarie Infrastructure Group. MQA made its debut at a slight premium to the net cash held at holding company level, with no value attributed to the value of its other assets.

RESULT: If such investors had investigated, they would have found that MQA's assets comprised a collection of toll roads. In addition MQA was debt free at the corporate level and held 228m in cash. The Company also owned a toll road listed in France with a stake worth 1.8 billion alone. Put another way, this asset was worth 13x the enterprise value of MQA. A rare bargain! We sold after the shares tripled.

Identifying value amid the Gulf of Mexico Oil Spill

SITUATION: when jewelry company Pandora A/S listed in 2010, investors scrambled for shares in the largest Danish IPO in 16 years. Pandora had enjoyed great success with its business model of selling a bracelet and separate charms, which its customers buy over time. The effect is that its customers end up spending far more money on charms to fill up the bracelet as compared to what they might spend in a typical one-off jewellery purchase. As a result, Pandora has enjoyed an impressive return on invested capital above 40% and dramatic growth in recent years.

OPPORTUNITY: in the face of commodity price increases the (now former) CEO announced that Pandora would meet its aggressive growth forecasts by hiking prices by 30%. As a result of this ill-conceived price increase, Pandora lost around two-thirds of its market value after it was forced to cut its full-year forecast when customers rejected the new prices. Pandora was priced by the market as if it would never recover from this debacle. However, we took the view that the company had a modest amount of debt and was likely to meet its revised downward forecast. We established a position at an entry price that represented 4x Pandora’s forward earnings.

RESULT: We were aware of the various risks, mainly fashion risk. However, our entry price more than compensated for this. We sold the investment once the stock had appreciated 20-fold, for our best investment result to date.